Draft special Brexit legislation – a case of friendly fire?

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If no deal on the terms of the United Kingdom’s exit from the European Union is reached by 29 March 2019, the UK will become a “third country” whose companies and undertakings will no longer benefit from the EU freedoms of provision of services and of entrepreneurship.

These effects will be particularly severe for financial services sector entities operating from the UK. Many of those entities have spent the last two years proactively planning for the contingency of a ‘hard’ Brexit. As a law firm, we have assisted and are assisting a range of financial institutions – credit institutions, investment firms, and insurance companies – with these preparations. Those measures have included relocating operations to a Member State other than the UK, detailed pan-European surveys of the rules for performing given activities in individual Member States, etc.

Many of our Clients considered a ‘hard’ Brexit scenario as a contingency only. Being responsible, however, they wanted to be secure. The Polish Ministry of Finance has now decided to take the initiative with regard to those who did not take such steps. With just over three weeks to go before Brexit, a draft Act has just been published, which was adopted by the Council of Ministers.[1] The draft Act – in a selective and hasty manner – attempts to postpone the problem of Brexit by introducing certain additional transitional periods (from 6 to 24 months, depending on the type of activity or type of agreement) for the provision of selected financial services, as well as banking outsourcing.

Work on the draft will of course continue in Parliament, but given the impending Brexit deadline, and if the current haste is any indication, the chances of a substantial improvement of the Act are slim..

The current version of the draft raises significant concerns and rather than protecting market participants exposes them to entirely new risks. For instance, with regard to the banking sector itself:

  • The starting premise of the draft is that post-Brexit continued performance of pre-existing credit agreements with UK lenders, will not be possible. This is surprising and fails to take into account the fact that lending activity as such is not regulated in Poland and the Banking Law reserves for banks only the active and organized “granting of credits” (art. 5(1)(2) of the Banking Law). In fact, the introduction of a 24-month transition period worsens the situation of Polish borrowers, because as it is, there is of course no prohibition for a Polish entity to be a borrower under a credit agreement with a lender based in a third country;
  • The draft also prohibits the conclusion of new agreements and certain amendments to pre-existing agreements (art. 2(2) of the draft). Again, this is questionable, if only in view of the principle of freedom of movement of capital in relations with third countries, and so-called passive freedom of services (reverse solicitation) invoked by the European Court of Justice;
  • The application of art. 2 of the draft Act is limited only to credit agreements in the meaning of the Banking Law which appears to leave other forms of financing (loans, factoring, leasing, etc.), financing agreements governed by foreign laws, and a range of other banking services (such as guarantees) outside the scope of its application. In particular, the draft Act seems to completely ignore the question of … deposits and their protection – something which, in principle, should be of primary interest to the Polish legislator;
  • The draft also provides for the possibility to continue performance of outsourcing agreements governed by the provisions of the Banking Law and agreements on savings and credit unions until there are terminated, no longer however than for 12 months and provides no accommodation for obtaining during this period a regulatory clearance for such non-EU outsourcing.

Many similar doubts appear with regard to the proposed transitional regulation of payment services, insurance activity, and investment activity.

Finally, the draft Act also puts the Polish Financial Supervision Authority, KNF (Komisja Nadzoru Finansowego), in a difficult position, by entrusting KNF with the supervision of the mentioned foreign entities (we assume, of course, that this means in the scope of their operations in Poland, though this is not directly stated). Under the European passporting regime, the KNF did not exercise this supervision to date – it will thus have to prepare for it at the same extraordinary speed as the Act’s expected legislative process..

[1] https://legislacja.rcl.gov.pl/projekt/12321274/katalog/12572359#12572359